A Monsanto case that could alter the dynamics of technology transfer to India

The IPKat is delighted to receive this guest post from long time Katfriend and sometime blogger Prashant Reddy (details at the end of the post).

For the last
several months Monsanto and Indian seed companies, backed by the Indian government
(& state governments) have been locked in a wide-ranging legal dispute over
the use of price-control legislation to fix IP licensing fees, the demand for
compulsory licences for Monsanto’s patent over its Bt technology, demands by
state governments for the outright revocation of Monsanto’s patent over its Bt technology, and an ongoing investigation into Monsanto’s licensing deals.

Before
explaining the legal dispute, it may help to first understand the technology
involved along with the licensing model adopted by Monsanto in India.

The
technology, the patent and the business model

A cotton bollworm larva

The
technology in this case is Monsanto’s famous Bt technology, which involves the
introgression of certain genes of Bacillus
thurgingiensis(Bt), a naturally occurring bacteria, into the genome of cotton seeds
in order to ensure the resulting crop’s resistance to certain pests of the lepidopteran species. In specific, Monsanto’s technology is known to act against the
Bollworm which is the most atrocious of pests that attacks and destroys the
cotton crop. The use of this technology reduces or maybe in some cases even
eliminates the pesticides that are required to be used by farmers.

Although the first generation of Bt technology, was never patented by Monsanto in India, the second generation Bt technology licensed under the
trademark Bollguard-II variety ® is patented. Monsanto was granted Indian
patent 232681 (drawing priority from US 60/297,406)
on March 20, 2009 for the “Cotton event Mon 15985 and compositions and methods
for detection”. Claim 1 of this patent is for a synthetic DNA molecule,
comprising a particular genetic sequence consisting of selected Bt genes
which are inserted into the genome of cotton seeds.

As per the entries in the patent register, Monsanto has licensed this patent
to its joint-venture in India called the Mahyco Monsanto Biotech (India) Ltd.
which has in turn entered into sub-licences with approximately 40 Indian seed
companies. These seed companies evolve their own seed varieties, which can be
protected under the Protection of Plant Varieties & Farmers Rights Act,
2001 and these seeds are then introgressed with Monsanto’s patented gene
technology. Monsanto is paid a royalty for the patented technology, know-how
etc. As per Monsanto’s filing with the Patent Office in 2013, it earned an
annual revenue of 6.85 billion rupees in that year (Approx. US $110 million
dollars in 2013).

Price control over technology licensing fees

A constant complaint against Monsanto from the very beginning has been
that its technology licensing fees for Indian seed companies are too high, thereby raising prices for the cotton seeds that are sold to farmers. About a
decade ago, Indian state governments successfully applied pressure on Monsanto to
reduce the technology licensing fees for its unpatented BG-1 technology. This
happened at a time when Monsanto didn’t have any patents in India for its
technology.

Over the last few years, the pricing issue has once again come back
into focus. This time state governments enacted legislation to control the
retail prices of seeds but most have not interfered with the technology license
fee charged by Monsanto to seed companies. The Indian seed companies felt the
pinch of the price control legislation because, while the states were reducing
the retail price of cotton seeds, Monsanto was refusing to reduce its
technology licensing fee. Thus the margins of the seed companies were getting
squeezed.

All of this changed in December 2015 when the Ministry of Agriculture
of Government of India notified the Cotton Seeds Price (Control) Order (CSPO),
2015. This Order derives its authority from the Essential Commodities Act, 1955 – legislation which vests in the government powers to control the
prices of a wide range of essential commodities such as drugs, food crops,
sugar, foodstuffs etc. for the purpose of securing the “equitable distribution
and availability of these commodities at fair prices or for maintaining or
increasing supplies of the same”. This legislation is usually used to control
the retail price of the commodity in the market. To the best of my knowledge,
this legislation has never been used to control the royalty or licensing fee for
the use of a patent or technology transfer. Even in the context of drugs, the
Drug Price Control Order (DPCO) has always covered only generic drugs despite
calls for it to be extended to patented drugs.

The CSPO however makes it expressly clear that while the Government is
fixing the maximum retail price of cotton seeds, “it shall also fix and
regulate the seed value and license fee including royalty or trait value, if
any, that constitute components of the Maximum Sale Price”. The phrase “royalty
(trait value)” is defined in the Order as “the amount which the Licensor
collects from the Licensee under the License Agreement for granting licence to
GM Technology”. Technically this could include even the royalties for know-how
or trade secrets not covered by patent. The phrase “GM Technology” itself is
defined in the CSPO to specifically include Bt technology.

The interesting question of law thrown up by this case is whether the
Essential Commodities Act can be used by the Government of India to control the
royalty fees in patented technology when the Patents Act, 1970 specifically
provides for a mechanism, involving compulsory licences, to help reduce the
prices of patented technologies if it is in public interest. Monsanto and its
Indian subsidiaries have already challenged this order before the Delhi High Court and the determination of this dispute by the Delhi High Court will
have a direct implication on the price control of patented pharmaceuticals –
which is a far more explosive an issue than cotton seeds. The larger
implication of course is on future technology licensing deals with Indian
parties. Any decision by the Delhi High Court to uphold the CPSO would mean
that the Government of India, and in some cases even State Governments, could
intervene to regulate technology licensing fees between two private parties.

The demand to issue compulsory licences

Earlier this month, the Indian media had reported that the Government of Andhra Pradesh, a major cotton growing state in South
India (& home to the largest Indian seed companies), has written to the
Government of India asking it to invoke its powers under Section 92 of the
Patents Act to issue compulsory licences for Monsanto’s patent on the grounds
that “Monsanto is having a monopoly and through one-sided sub-licence
agreements is completely controlling all the cotton seed firms and, thereby,
collecting excessive royalties”. Section 92 is a provision which states that
the Central Government may in cases of a national emergency or in case of
extreme urgency or in case of public non-commercial use, make a declaration
that a certain patent will be available for compulsory licensing. This
provision is different from Section 84, under which Bayer’s patent was
compulsory licensed to Natco, an Indian company. Under Section 84, the burden of
proof is on the person seeking a CL and it is not easy to establish the
threshold for the grant of a CL. This threshold includes unreasonable prices,
unavailability of the patented commodity etc. However under Section 92, once
the govt. makes a determination that a CL needs to be granted, third parties
are relieved of the burden of establishing the threshold required under Section
84. They are then only required to make an application the Controller of
Patents who is required to grant a compulsory licence on certain terms and
conditions determined by him.

In 2013, the Central Government was seriously considering the possibility of invoking Section 92 for 3 cancer drugs:
Herceptin, Dastinib and Ixabepilone. The Indian Government never went through
with the threat and no CLs were ever issued. Whether the Government of India
acts on this request from the Government of Andhra Pradesh remains to be seen.

Revocation request under Section 66

The
Government of Andhra Pradesh has
apparently also requested the Government of India to revoke Monsanto’s
patent under Section 66 of the Patents Act. This is a provision which allows
the Central Government to revoke patents in ‘public interest’ if the Government
is of the opinion that “a patent or the mode in which it is exercised is
mischievous to the State or generally prejudicial to the public”. The patentee is
given a hearing after which the Government is only required to publish a
declaration in the Official Gazette revoking the patent. This provision has
been used twice in the past. The first such revocation was in 1994, of a patent
granted to Agracetus, for a method to genetically modify cotton
cells. The second such revocation, in 2013, was of a patent belonging to Indian
company Avesthagen because it allegedly claimed traditional
knowledge. The Traditional Knowledge Digital Library (TKDL) had challenged the
European equivalent of the patent (which had in any case been objected to by
the EPO) but had not opposed the equivalent Indian patent. Once this was
reported on SpicyIP, the Indian Government used its powers under Section 66 to
revoke the patent. It is quite unlikely that the Government of India will use these
powers under Section 66 because the provision isn’t exactly TRIPS compliant and
any action under this provision is likely to stir controversy on the
international stage.

The
lawsuits before the Bombay and Delhi High Courts & the inevitable question
on gene patents

Since late last year there has been a virtual explosion of litigation
between MMBL and the Indian seed companies. The first series of litigation kicked of last year after 8 of the largest Indian seed companies
refused to pay MMBL outstanding royalties of approximately four billion rupees.
The refusal was triggered by the fact that state governments were clamping down
on the retail prices of cotton seeds under price control legislation and MMBL
was refusing to reduce its technology licensing fee. As a result the Indian
seed companies were faced with squeezed margins. In retaliation to the
non-payment of royalties, MMBL terminated the licensing agreements, initiated
arbitration proceedings before the Bombay High Court and infringement
proceedings before the Delhi High Court. As per recent reports, Monsanto and
its group companies have instituted trademark infringement proceedings before
the Delhi High Court against Nuziveedu Seeds Ltd. The court order is
unavailable but according to the news reports the court passed
interim orders restraining Nuziveedu from selling the seeds manufactured after
November 2015 and the company was also ordered to pay Monsanto the royalties on
the existing stock. It isn’t clear how the High Court issued such interim
orders for damages before trial. Due to a new law governing commercial
litigation in India, such interim orders cannot be appealed – only final
judgments can be appealed.

Also inevitable in this series of litigation is a challenge to
Monsanto’s patent – to the best of my knowledge, gene patents have never been
litigated in India. If Nunziveedu Seeds Ltd. decides to challenge the validity
of Monsanto’s patent any resulting litigation will be high-profile because
Monsanto is one of those companies that everybody loves to hate in India.

The Competition Commission investigation

In addition
to all of the above, the Competition Commission of India (CCI) has recently
ordered an investigation into MMBL’s licensing deals, after receiving a
reference from the Ministry of Agriculture and a separate complaint from
Nuziveedu Seeds Ltd. MMBL is Monsanto India’s JV which licences the patent in
question from Monsanto Technology LLC (USA) and then in turn sub-licences the
technology to over 40 Indian seed companies.

The
procedure before the CCI is two-fold. At the first stage, the CCI determines
whether there exists a prima facie
case of violation of the Competition Act and if it does make such a
determination, an investigation will be conducted by the Director General’s
office, after which a hearing is conducted on the merits and a ruling is
delivered. If no prima facie case is
made out the complaint is dismissed.

In this
particular case, the CCI has found that MMBL is prima facie in a dominant position in the relevant product market (identified
as the provision of Bt cotton technology in the upstream and manufacture and
sale of Bt cotton seeds in India in the downstream) and the relevant
geographical area (identified as the entire country of India). While there is
no denying that MMBL has virtually 99% of the market share, the issue of dominance
should be judged by the ability of MMBL to operate independently of competitive
forces prevailing in the market. In other words, if the market offers alternatives
whereby the downstream player is able to substitute MMBL’s technology or
survive without MMBL’s technology, the company should not be found to be the
dominant player.

In this
case, it is entirely possible to manufacture cotton seeds without Bt
technology, except the farmers planting these seeds will have to use pesticides
to tackle the Boll Worm. Prior to 2001, Indian farmers were growing cotton
without the Bt technology. MMBL’s technology is therefore substitutable.
Further, even with regard to Bt technology, MMBL has been licensed a patent for
only one particular gene sequence – its competitors can still use the old Bt
technology which is not patented or innovate to create new GM hybrids. In fact,
recent news
reports indicate that the publicly funded Central Institute for Cotton
Research (CICR) has begun field trials with 21 different varieties of cotton
seeds which have been introgressed with Bt technology. In either case, the CCI
should have interpreted the scope of MMBL’s patent and analysed whether
competitors were completely precluded from entering the market. Unfortunately
there is no such discussion in the order.

After
finding that MMBL had a dominant position, the CCI also found that the company
was abusing its dominant position because the termination conditions imposed by
MMBL in its licences were allegedly unreasonable and beyond what was required
to legitimately protect its IP rights. One of the termination conditions
imposed a requirement to inform MMBL within 30 days if the licensee was
developing hybrid cotton seeds with technology derived from MMBL’s competitors.
Other conditions required that once a termination notice was served, the
licensee immediately stop selling the seeds in question followed by destroying
the seeds in existence and also destroying all the parent lines. An additional
condition allowed MMBL to terminate the sub-licence if any law was enacted to
restrict the technology licensing fee. The CCI also accepted the allegation
that MMBL may have terminated the licenses with the informant in order to
protect its presence in the downstream market i.e. the seed markets in which
its group companies were involved. The imposition of such restrictive
conditions along with the suspicion that MMBL was influencing the downstream
market through its group companies led to a preliminary, prima facie finding of
abuse of Monsanto’s dominant position.

Once again,
the above reasoning isn’t clear. The termination conditions which the CCI finds
to be an ‘abuse’ are basically the boiler-plate clauses in any technology
transfer contract and are the industry standard. Further the allegation that
MMBL was terminating the licenses of companies like Nuziveedu just to protect
its group companies isn’t really tenable – the 8 sub-licenses were terminated
by MMBL because of non-payment. Besides, there are approximately 32 other
sub-licensees for the technology – so there is considerable competition in the
downstream market. Unfortunately, the CCI’s analysis does not cover any of
these issues. Hopefully the investigation by the Director General will bring
out these points in more detail.

In addition
to the preliminary finding of abuse of dominant position, the CCI also made a
preliminary finding that the licensing agreements were themselves
anti-competitive in nature because of the stringent termination conditions
discussed above. In the Commission’s words “The termination conditions are
found to be excessively harsh and do not appear to be reasonable as may be necessary
for protecting any of the IPR rights, as envisaged under Section 3(5) of the
Act. Such agreements discourage and serve as a major deterrent for the sub
licensee from exploring dealing with competitors.” This reasoning is simply not
convincing because such conditions are part and parcel of any tech-transfer
deal. Hopefully the investigation by the Director General will do a better job.

Notwithstanding
that the CCI’s findings are only preliminary – MMBL’s stock tanked 4% after the
announcement of the investigation. The manner in which the Indian judiciary and
regulators deal with the issues raised in this case is going to have a profound
influence on the manner in which technology is transferred to Indian companies
in the future.

For a bit of
history on this post, do read my earlier post on SpicyIP over here.

The writer
is an Indian lawyer. He can be contacted at preddy85@gmail.com

A Monsanto case that could alter the dynamics of technology transfer to India
Reviewed by Darren Smyth
on
Friday, March 04, 2016
Rating: 5

2 comments:

* A clarification for the readers:In the paragraph describing the lawsuits before the Delhi High Court, I've stated that there are no appeals against interim injunctions under the new Commercial Courts Act - that was a misreading of the law - Section 8 of the Commercial Courts Act only bars applications or petitions for civil revision. It does not bar appeals against interim injunctions.

I really liked the article. Very informative. However, have two points to put forth.1.Even if there are pesticides available and "[P]rior to 2001, Indian farmers were growing cotton without the Bt technology", one cnnot say that MMBL's technology is substitutable. Pesticides and genetically modified variety are completely different things. ALso, the modes of achieving the "consequential aspect" by the both are absolutely different. 2. The boiler plate clause do have a meaning. Their insertion into an agreement is not merely mechanical. If they have some implications, they should be brought to the scrutiny of the court.